Date: 20020408
Docket: 2001-2409-GST-I
BETWEEN:
KWOK KEN LOUIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
McArthur J.
[1] This appeal is from an assessment under the Excise Tax Act with respect to outstanding goods and services tax (GST), the denial of input tax credits (ITCs) and the imposition of interest and penalties. The appeal is for the reporting period from January 1, 1996 to December 31, 1997.
[2] The Appellant was a self-employed construction worker who operated his own business alone. While a skilled handyman, his bookkeeping skills were very limited and his accounting records were in disarray. The Minister of National Revenue (the Minister) assessed GST on cash and cheques of an unsubstantiated nature deposited to the Appellant's bank accounts of $24,248 in 1996 and $63,544 in 1997 and did not allow ITCs in respect of certain expenses.
[3] The Appellant did not register under Part IX of the Act until November 1998 when he was registered by an officer of the Minister after completion of an audit. The GST registration number assigned to the Appellant was effective January 1, 1996. The Appellant was not a small supplier as defined in the Act and was, therefore, required to collect GST on his taxable supplies but he failed to do so.
[4] After the audit, the Minister determined the following:
m) in respect of his commercial activities for the period from January 1, 1996 to December 31, 1997, (the "Assessment Period") the Appellant did not report total taxable supplies of $188,323.13, as detailed in the attached Schedule "A";
n) during the Assessment Period, the Appellant under-reported GST collectible in the amount of $13,182.62, as detailed in the attached Schedule "A";
o) during the Assessment Period, the Appellant reported on his T1 Income Tax Returns business expenses of $58,606.42, as detailed in the attached Schedule "B";
p) business expenses of $22,551.13, as detailed in the attached Schedule "B", were denied for the following reasons:
i) they were not incurred for the purpose of gaining or producing income from a business, but were personal or living expenses within the meaning of paragraph 18(1)(h) of the Income Tax Act.
ii) the recipient of the supplies were persons other than the Appellant, and
iii) the Appellant could not substantiate that the purchases were incurred.
q) during the Assessment Period, the Appellant was allowed input tax credits ("ITCs") of $2,358.75, as detailed in the attached Schedule "B";
r) the Appellant failed to provide sufficient documentation to substantiate the amount of GST collected or collectible as being any less than that calculated by the Minister for the Assessment Period;
s) the Appellant failed to provide sufficient documentation to substantiate any eligible ITCs beyond those allowed by the Minister for the Assessment Period;
t) ITCs were disallowed on the basis that the Appellant was not the recipient of certain supplies and that certain supplies were in respect of the construction of his personal residence located at 7122 Clarendon Street, Vancouver, British Columbia; and
u) the Appellant did not exercise due diligence in ensuring that the correct amount of net tax was reported and remitted to the Receiver General.
[5] The Minister assessed the Appellant for unreported net tax of $10,823, interest of $1,308 and penalty of $1,766. The Appellant was represented by Ms. Mirada Tam of Yu-Te Chang and Company, certified general accountant. The agent for the Appellant stated the following in a letter dated June 25, 2001 attached to the Notice of Appeal:
The Appellant claims that, in computing the amount of GST collectible for the reporting period from January 1, 1996 to December 31, 1997, the addition of unreported deposits totalling $24,248.68 in 1996 and $63,544.45 in 1997 should not be included. Reasons are as follows:
(1) the unreported deposits in 1996 and 1997 were not business income for income tax purposes;
(2) portion of the unreported deposits was personal loan repayments and payments;
(3) portion of the unreported deposits was reimbursement by an architect company, Polyland Investment & Consultants Inc., for payments to subcontractors by the Appellant.
The amount of the appeal is $10,823.87 (net tax assessed).
The Appellant also claims that all up-to-date arrears interest and/or penalties for the GST reporting period from January 1, 1996 to December 31, 1997 should be waived.
[6] The Appellant claimed that previously unexplained deposits consisted of personal loans and the repayment of loans. Ms. Tam, on the Appellant's behalf, admitted that the Appellant "has no idea of the proper way to do bookkeeping, so he's not a very organized person ... he agrees that this is actually a very good lesson for him, so we wish this case will be dealt with in a lenient way".
Analysis
[7] The following statements of Bowman J. in 620247 Ontario Ltd. v. The Queen[1] apply to the present case:
... In a case involving a challenge to a GST assessment the onus of proof is the same as in an income tax appeal. Where the issue is one of fact, as it is here, the appellant has the onus of establishing on a balance of probabilities that the assessment is wrong. No question of law is raised in this case and it is of course inappropriate to speak of onus of proof where the issue is one of law. Where penalties are imposed under section 280 by reason of an underpayment of tax, the respondent's onus is satisfied by establishing such underpayment and the amount thereof. Such strict, as opposed to absolute liability, penalties are susceptible of a defence of due diligence: Pillar Oilfield Projects Ltd. v. The Queen [1993] G.S.T.C. 49 (T.C.C.). The appellant has the onus of establishing due diligence.
...
The assessment is based upon the assumption that the bank deposits are about as accurate an indication of the sales as one is likely to get, given that the appellant kept no books and its only record of sales was the sales slips, which were incomplete and essentially in an unsatisfactory state. It may be a fair surmise that some of the bank deposits came from sources other than sales but the evidence simply does not establish how much. In a case of this type, which involves an attempt by the Department of National Revenue to make a detailed reconstruction of the taxpayer's business, it is incumbent upon the taxpayer who challenges the accuracy of the Department's conclusions to do so with a reasonable degree of specificity. That was not done here. A bald assertion that the sales could not have been that high, or that some unspecified portion of the bank deposits came from other sources is insufficient. ...
[8] The Minister conducted an audit of the Appellant's business affairs and the assessment is based on unexplained bank deposits taken to be proceeds of sales. It is the best evidence the Minister had because the Appellant kept unsatisfactory records. The Appellant claimed that these bank deposits came from sources other than sales. This may be so, but the evidence does not establish it. If the taxpayer wishes to challenge the accuracy of the Minister's assessments, he must do so with more specific evidence than presented here. It is not sufficient to state that some of the bank deposit sources were from the corporation, Polyland Investments & Consultants Inc., and some deposits were from relatives repaying loans. The Appellant provided several signed statements acknowledging loans owed to him. Two of these were conflicting. There were no corroborating witnesses. The Appellant was the only one to testify.
[9] An auditor with Canada Customs and Revenue Agency testified on behalf of the Respondent. Upon reviewing the Appellant's income tax accounts, he recognized that the Appellant should have been registered for GST and was not. The auditor reviewed the bank account deposits, eliminated term deposits, GICs, child tax benefits and interest. Apparently, the Appellant gave him several conflicting explanations for the unidentified deposits. There was no corroborative evidence. At the hearing of this appeal, the Appellant's agent produced several promissory notes from relatives which were of little assistance. Polyland Investments was not mentioned by the Appellant until shortly before the hearing and I do not accept this explanation.
[10] Section 240 of the Excise Tax Act requires registration for the purposes of GST.
[11] At the audit stage, the Appellant explained that there were two $20,000 loans which made up the deposit variances. Further, after obtaining a second accountant, he stated there was an additional amount of $50,000 he received from his father. Then, just prior to trial, he stated he received money from Polyland. There was no corroborating evidence and his evidence was inconsistent. The Appellant has not met the burden of satisfactorily explaining the deposits in question.
Penalties
[12] Section 280 of the Act imposes interest and penalties where a taxpayer fails to pay an amount on time. The auditor found that the Appellant never filed GST returns. As held in Pillar Oil Fields, supra, section 280 penalties are subject to a defence of due diligence. The Appellant has not established this defence. He had not registered as required by section 240 and his bookkeeping was almost non-existent. He did not make a sincere and demonstrable attempt that a reasonable person in similar circumstances could be expected to make to comply with the law. I recognize that GST accounting is complex and the Appellant has little formal education and probably does not read or write English. He gave evidence through an interpreter.
[13] Compliance with the GST legislation is somewhat difficult and beyond the reach of many Canadians, let alone the Appellant, but here the Appellant made no effort whatsoever. He did not seek advice. Surely, to satisfy due diligence, his minimal requirement would be to speak to an accountant in the Vancouver Chinese community. He did not do this until he was audited. In fact, he did nothing. He kept no or inadequate records and did not seek advice or register. He appears to have had a busy construction business and must have been made aware of the existence of GST and income tax requirements. One cannot simply ignore legislation because it is confusing.
[14] The appeal is dismissed.
Signed at Ottawa, Canada, this 8th day of April, 2002.
"C.H. McArthur"
J.T.C.C.
COURT FILE NO.: 2001-2409(GST)I
STYLE OF CAUSE: Kwok Ken Louie and
Her Majesty the Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: January 24, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge C.H. McArthur
DATE OF JUDGMENT: April 8, 2002
APPEARANCES:
Agent for the Appellant: Mirada Tam
Counsel for the Respondent: Jasmine Sidhu
COUNSEL OF RECORD:
For the Appellant:
Name: N/A
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-2409(GST)I
BETWEEN:
KWOK KEN LOUIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 24, 2002, at Vancouver, British Columbia, by
the Honourable Judge C.H. McArthur
Appearances
Agent for the Appellant: Mirada Tam
Counsel for the Respondent: Jasmine Sidhu
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated March 29, 2000, and bears number 11BU0600893 for the reporting period January 1, 1996 to December 31, 1997 is dismissed.
Signed at Ottawa, Canada, this 8th day of April, 2002.
|
"C.H. McArthur" |
J.T.C.C.